Thursday, December 18, 2008

Deep Capture

Mary Shapiro, Obama's SEC chief should do lunch with the author of this blog:

Here is a recent entry from his blog. If any of you have ever walked into an SEC office to bring a complaint against a public company, person or fund you know that the presumption of innocence for the entity you believe needs investigation is on them, not on the person walking in to bring the complaint. I've been there and they act as if they are doing you a favor to even listen to your complaint. Shapiro has done little for FINRA and it will take tremendous change for her to do anything at the SEC. It should be quickly disbanded and a new regulator be put in place that can address the markets of 2009 and beyond. It wouldn't be that hard if politics were taken out of the equation. Unfortunately, it is all politics and money. What else is new?

A Ponzi Scheme that is Bigger than Bernard Madoff’s

December 13th, 2008 by Mark Mitchell
Bernard L. Madoff’s fraud is “stunning,” says the SEC. It is a crime of “epic proportions.” But, says the SEC, we have nothing to worry about. The SEC caught the bad guy. It “moved swiftly” to protect the integrity of the financial markets.
The only thing “stunning” is that the SEC continues to condone and even fraternize with the organized mob of hedge fund miscreants who have destroyed hundreds of companies, wiped out the jobs of countless ordinary folks, and brought our financial system to the brink of ruin.
The Madoff case may one day prove to be “epic,” but right now it can best be described as “pathetic” – or just plain “weird.”
Apparently, the SEC began receiving tips from Madoff’s enemies (rival brokerages, private investigators working for rival hedge funds, etc.) several years ago. The commission made inquiries, but took no action.
Then, earlier this week, Madoff purportedly had some kind of nervous breakdown, announcing to his sons that he was a criminal.
If we can believe the news reports, the sons then called the FBI, which dispatched an agent to Madoff’s apartment.
Madoff, dressed in a baby blue bathrobe and slippers, opened the door, and said, “I know why you are here.”
With that, the agent arrested Madoff, and within a few hours the FBI and the SEC had whipped out cases accusing Madoff of wrong-doing, but providing few details.
Indeed, it is clear from reading these cases that the FBI and the SEC know nothing about Madoff’s market making and hedge fund firm except that two employees (Madoff’s two sons) have made the vague claim that Madoff told them, vaguely, that his hedge fund was “a giant Ponzi scheme.”
Madoff’s lawyer says his client has admitted to no such crime.
Children do not usually turn in their fathers to the FBI unless they bear other grudges. And it is standard operating procedure for shady high-finance predators to sniff out and prey on feuding relatives who are in business together.
This in no way suggests that Madoff is clean, but it raises the possibility that even dirtier people orchestrated the demise of Madoff and his hedge fund in order to absorb his more lucrative (and crooked?) market making operation.
An alternative explanation comes from Bill Cara, one of the nation’s more perceptive business writers. He concludes that Madoff “is just the beginning. I don’t know, of course, more than you, but…I think he has in fact indicted himself to cause prosecutors to investigate the entire corrupt system.”
Whatever the real story, it is clear that market makers are accessories to a scheme that is much, much bigger than Madoff.
The key players in this scheme are 20 or so mega-billionaire hedge fund managers, who operate with a supporting cast that includes not just market makers, but also smaller hedge funds, rogue prime brokerages, corrupt lawyers, dishonest journalists, bogus one-man credit rating agencies, dubious index trackers, bribed “experts,” skalawag statisticians, compromised professors, private investigators, crooked financial researchers, captured government regulators, hustlers, felons, thugs and mafiosi.
The mega-billionaires masterminded their scheme in the 1980s, and ever since, they and their progeny have been working together – raiding and destroying public companies for profit. In the rubble of these attacks (there are hundreds of examples) one can almost always find evidence of unrestrained naked short selling (people selling things that they do not possess – phantom stock, phantom bonds, phantom mortgage backed securities, phantom CDOs, all manner of phantom derivatives).
This is the organized exploitation of our national clearing and settlement system – a system that fails utterly to ensure that traders actually deliver that which they have sold. If the SEC and FBI are looking for a “Ponzi scheme” of “epic proportions” – this is it.
Mr. Madoff surely knows something about this scheme. Market makers (Madoff’s operation was among the better known) are exempt from rules prohibiting naked short selling. They can sell stock that they have not yet borrowed or purchased, so long as they are legitimately “making a market” (i.e. maintaining liquidity) — and only if they intend to settle the trade soon after. In practice, however, billionaire hedge fund managers have rented market makers’ exemptions to manipulate markets with phantom securities – a blatant crime that is rarely prosecuted.
While Mr. Madoff is talking to the SEC and the FBI, I am going to begin telling you more about the scheme that is bigger than Bernie. Soon, I will name those 20 mega-billionaires, their supporting cast — and the man who is their guru. The evidence is pouring in – there is much to reveal.
But for now, let me leave you with a quotation from the Financial Industry Regulatory Authority’s “Notice 93-77.” Published in 1993, it reads:
Shortly after the market crash of 1987, “then Treasury Secretary Nicholas F. Brady referred to the clearance and settlement system as the weakest link in the nation’s financial system…Gerald Corrigan, President of the Federal Reserve Bank of New York noted: ‘The greatest threat to the stability of the financial system as a whole was the danger of a major default in one of these clearing and settlement systems…”
“The connection between a crisis in the clearance and settlement system and the financial industry was highlighted by the bankruptcy in 1990 of Drexel Burnham Lambert Group…As described in the [SEC’s] testimony before the Senate Banking Committee, near gridlock developed in the mortgage-backed securities market and in the corporate debt and equity markets where Drexel was an active participant.”
Now that our financial system has come to a screeching halt, read those words for clues as to how much worse things can get – and whom we need to stop to prevent that from happening.
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Mark Mitchell is a reporter for He previously worked at the Wall Street Journal editorial page in Europe, Time magazine Asia, the Far Eastern Economic Review, and the Columbia Journalism Review. Email:

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